HP: $8.8B Autonomy Charge, Misleading Accounting Before M&A

Written by The VAR Guy 1
November 20, 2012

Hewlett-Packard (NYSE: HPQ) Q4 2012 results, announced today, included an $8.8 billion charge related to the Autonomy acquisition.

Hewlett-Packard (NYSE: HPQ) Q4 2012 results, announced today, included an $8.8 billion charge related to the Autonomy acquisition. In a tersely worded statement, HP said the majority of the impairment charge is “linked to serious accounting improprieties, disclosure failures and outright misrepresentations at Autonomy Corporation plc that occurred prior to HP’s acquisition of Autonomy and the associated impact of those improprieties, failures and misrepresentations on the expected future financial performance of the Autonomy business over the long-term.” The big questions: Does HP have legal recourse here (maybe yes), and can HP restore faith in its Autonomy business unit?

Former HP CEO Leo Apotheker led the Autonomy acquisition in mid-2011. From the start the buyout was controversial. Wall Street alleged that HP was paying too much for Autonomy. By May 2012, Meg Whitman — Apotheker’s replacement — essentially warned that Autonomy was broken. In August, HP wrote down the struggling EDS buyout — triggering rumors that an Autonomy write-down could be next. And in October 2012, Whitman told Wall Street that HP’s turnaround was going to take multiple years to complete.

Autonomy Accounting Under Fire

Fast forward to this morning and HP confirmed Wall Street’s worst fears: An $8.8 billion charge related to buying Autonomy. Even worse: HP essentially is saying the M&A process with Autonomy was flawed from the start. Either HP didn’t do its homework or Autonomy misled HP — or both.

Can HP seek legal recourse against those at Autonomy who allegedly misled HP? Hmmm… The VAR Guy is checking with sources and watching SEC filings closely.

For channel partners and customers the big question is this: Can HP and Autonomy turn the page quickly and assure customers that Autonomy is an innovative software company? Frankly, The VAR Guy will be watching that issue closely over the next few weeks and months.

Overall, HP Q4 2012 results, unveiled this morning, fell short of Wall Street’s expectations and HP shares are down roughly 10 percent on the news. For the fourth quarter, net revenue of $30.0 billion was down 7% year over year and down 4% when adjusted for the effects of currency, according to HP. The company also offered a business-by-business up. Here are the facts along with The VAR Guy’s spin.

HP Said: Personal Systems revenue was down 14% year over year with a 3.5% operating margin. Commercial revenue decreased 13%, and Consumer revenue declined 16%. Total units were down 12% with both Desktops and Notebooks units down 12%.The VAR Guy’s Spin: Will Windows 8 help or hurt in the quarters ahead? Customers now face an inflection point — learn a new Windows interface or open wider for iOS 6 and Google Android.
HP Said: Printing revenue declined 5% year over year with a 17.5% operating margin. Total hardware units were down 20% year over year. Commercial hardware units were down 15% year over year, and Consumer hardware units were down 22% year over year.The VAR Guy’s Spin: You can’t milk ink revenues forever.
HP Said: Services revenue declined 6% year over year with a 14.2% operating margin. Technology Services revenue was down 4% year over year, Application and Business Services revenue was down 7% year over year, and IT Outsourcing revenue declined 6% year over year.The VAR Guy’s Spin: The EDS acquisition continues to weigh on HP. So much for emulating IBM Global Services…
HP Said: Enterprise Servers, Storage and Networking (ESSN) revenue declined 9% year over year with an 8.3% operating margin. Networking revenue was up 7%, Industry Standard Servers revenue was down 7%, Business Critical Systems revenue was down 25%, and Storage revenue was down 13% year over year.The VAR Guy’s Spin: Good to see networking growth but how the heck are storage revenues falling when the overall storage market continues to grow?
HP Said: Software revenue grew 14% year over year with a 27.2% operating margin, including the results of Autonomy. Software revenue was driven by 9% license growth, 9% support growth, and 48% growth in services.The VAR Guy Spin: You can say anything you want about the revenue growth, but the real story is the Autonomy write down.
HP Said: HP Financial Services revenue grew 1% year over year as a 3% increase in net portfolio assets was offset by an 11% decrease in financing volume. The business delivered a 10.8% operating margin. The VAR Guy’s Spin: Time for HP to more aggressively promote special financing to VARs and channel partners. Financial services and lending programs drive partner loyalty.

The bottom line: CEO Meg Whitman in early October set expectations pretty darn low for HP, predicting that a turnaround will require a multi-year journey. Now HP is essentially saying Autonomy misled HP during the M&A process. Can HP rebuild faith in Autonomy — and faith in the overall HP brand? Hmmm…